Disney Is Said To Be Close To Acquisition Of Fox Family

By GERALDINE FABRIKANT with ANDREW ROSS SORKIN

Published: July 23, 2001

In a deal intended to make the Walt Disney Company a stronger force in the lucrative cable programming business, Disney is close to an agreement to buy Fox Family Worldwide from the News Corporation and its partner for $3.2 billion in cash, people close to the deal said yesterday.

The agreement, which is expected to be announced as early as today, would add a network with 81 million subscribers in the United States, 24 million in Europe and 10 million in Latin America to Disney's cable operations, which include the Disney Channel, Toon Disney, SoapNet and ESPN, along with stakes in Lifetime, A&E and E! Entertainment. Acquisition of the Fox Family channel would strengthen Disney's influence with younger audiences, give it another outlet for its existing programming as well as expand the Disney brand name overseas.

Although company executives declined to comment yesterday, people close to the cable services noted that in addition to the savings that could be derived from the deal, Disney had the potential to improve the service's relatively weak ratings among adults 18 to 49 years old. Not only could Disney create new shows for the channel, but it might rerun some of ABC's prime-time shows on the service.

Still, the deal would be costly for Disney, and other bidders, including Viacom and possibly AOL Time Warner, apparently passed on a deal. In addition to the $3.2 billion in cash that Disney will pay, the company will also assume $2.1 billion in debt as well as a preferred stock that is owned by the Liberty Media Corporation, people close to the talks said.

The sale would be a coup for the News Corporation and its partner, Saban Entertainment, because they would receive far more than the total of $3 billion to $4 billion that was expected. The News Corporation and Saban each own 49.5 percent of Fox Family Worldwide, while Allen & Company, the investment bankers, owns 1 percent.

The deal would strengthen the balance sheet of the News Corporation as its chairman, Rupert Murdoch, negotiates to buy Hughes Electronics, which runs the satellite service DirecTV, from General Motors. More important, the company does not need to buy the half of Fox Family it does not own. Last year, Haim Saban, who owns Saban Entertainment, exercised an option to sell his stake to the News Corporation.

Mr. Saban, whose greatest success with the channel was the ''Mighty Morphin Power Rangers,'' was never able to make the channel a brand name like Disney's or Viacom's Nickelodeon. But what it did have, as one person close to Disney put it, was ''terrific real estate,'' he said. ''It is like buying beach-front property in the Hamptons,'' he added, alluding to the wide distribution of the service here and abroad.

At least two Disney institutional investors, who spoke on the condition of anonymity yesterday because they had not seen the terms of the deal, said they liked it in principle. One noted that Disney was sticking with a business, programming, that is its core competence, and another said that he was not overly concerned that Disney was paying a high price because the deal provided the company with a strategic asset that it had an expertise in managing.

He added that Disney would be acquiring a widely distributed basic cable channel that would give the company an outlet for its own films and TV shows, ensuring that it would not have to sell them to rivals like AOL Time Warner's Turner Network Television, where it might not receive top dollar.

Still, Disney argued similarly when it acquired Capital Cities/ABC in 1996 that the broadcast network would give it distribution for existing programming, and that ability has not always benefited either the film division or the network. Over all, Disney has had some tough years. Since 1997, the company's revenue has grown only 13 percent, and profits have declined to $920 million from $1.97 billion in 1997. And one analyst who spoke on the condition of anonymity added that Disney would have had more flexibility if it had bought the business for stock, rather than tying up cash. However, several people close to the deal said that the News Corporation insisted on cash and wanted at least $5 billion.

Fox Family Worldwide is expected to generate about $150 million this year in cash flow, or earnings before interest, taxes, depreciation and amortization. That translates into a purchase price of about 35 times cash flow, which analysts said yesterday was extremely high. And Wall Street may worry that the high price will dilute Disney's earnings by about 5 percent, at least for the first year, analysts estimated yesterday. It would require virtually all of the cash flow from the channel to pay off the interest on the $2.1 billion in debt, even at Disney's relatively low borrowing rate of about 6 percent. People close to the transaction said that Disney could probably wring about $50 million in savings out of the company, once it was merged with Disney's channels, but that would still mean Disney had paid a multiple of 26 times cash flow.

A lot is riding on Disney's success in managing this acquisition. Not only must it improve ratings, but it has to raise advertising revenue significantly in a weak economy. While all the media stocks have been badly hit with the weakness in advertiser spending, Disney's shares have fared particularly badly, closing on Friday at $27, near a 52-week low.

The deal is likely to quell some Disney critics who have watched the media industry consolidate and worried that Disney was not moving aggressively enough to compete against rivals like the News Corporation and AOL Time Warner.

Michael D. Eisner, the chief executive of Disney, has said that he feels himself under pressure to expand the company. In a recent interview, he acknowledged that his strategy of not making major purchases to acquire distribution businesses like cable or satellite had come under fire but that Disney was a company that creates content, and that is what its expertise has always been.

The Fox Family purchase does add some distribution capability, but some media experts were surprised that Mr. Eisner, who has been a cautious spender, was suddenly making a purchase with such a high premium.